What Is Bond Maturity?
Maturity is one of the most important characteristics of a bond. It is an event that enables the investor to receive financial reimbursement of risks associated with the acquisition of bonds. The maturity date is the date when the issuer has to repay the nominal amount of a bond.
Bond Maturity Definition
It is a clearly defined date in the future, on which the issuer returns the nominal value of the bond to its holder. Today, bonds with maturities from 1 to 30 years are traded in open markets. The maturity dates and the bondholder rights must be stated in a special document - the bond issue.
By maturity, bonds are divided into:
- Short-term, with a maturity of up to 5 years.
- Medium-term - between 5 and 12 years.
- Long-term – over 12 years.
Often not a specific date, but the terms of maturity (indicating the starting and ending dates of payments) are indicated. In this case, the bond owner may demand the redemption on any day of the month that is specified in the stipulated time frame.
For many, the redemption option at the end of the maturity period is preferable, because various inconsistencies and technical difficulties may arise during the mass submission of documents for redemption. In this case, the issuer determines the priority of payments, taking into account the day when the claim is received from the bondholder. For convenience, the period of return on assets should correspond to the bond maturity. On average, this period takes from one to six months, but longer periods are also acceptable. It all depends on the nature of the company, the level of technical equipment, the volume of issued debt obligations, and other nuances.
In the case of bonds, the option of early redemption is allowed, when the issuer makes payments ahead of schedule. However, a specific period can be indicated, before the occurrence of which the bondholder cannot demand early redemption.
When carrying out an early redemption of bonds, investors are paid the nominal value of bonds with an offer to reinvest funds in securities of the same issuer with a lower level of yield. The risk of early revocation of bonds by the issuer is called “reinvestment risk”. Such a risk can be avoided by purchasing irrevocable bonds with a specific maturity date. For irrevocable bonds, the possibility of early redemption is not provided, but their yield is always lower than that of bonds with the right of revocation.
Bond Maturity: How It Works
Bonds are subject to redemption upon maturity date and receipt of an application from the holder. The holder receives either a predetermined percentage of the nominal value after they present coupon bonds or the nominal value in the case of discounted securities.
For coupon bonds, other redemption options are possible. They can bring not only cash income but also property dividends. For example, for mortgage bonds, their holder becomes the owner of real estate. Accordingly, bond redemption is carried in the following ways:
- Monetary. Payment of income to the bondholder is made either at a fixed or a variable interest rate. This point should be indicated in the issue decision.
- Non-monetary. The issuer gives the bondholder the right to choose whether to receive income in monetary or property form.
- Conversion. The old bonds are exchanged for new securities with a longer maturity date or for other shares of the issuer.
Certain types of bonds may have a different process of redemption. In particular, the redemption of non-documentary bonds is made on a date that is indicated in the issue decision. Only persons listed in the register of bondholders are entitled to claim such redemption. Redemption of bearer bonds requires compliance with two conditions: the actual maturity of bearer bonds and the bondholder’s request for their redemption.